Administering a Self-Insured Plan

The Role of The Employee Benefits Administrator - Types of Employee Benefit Plan Administration

All except the largest self-insurers appoint outside companies to handle the administration of their plans. The reasons for outsourcing are principally the need to hire the expertise and to avoid the high costs that would be associated with self-administration as well as removing any potential conflict of interests that might arise. ERISA places emphasis on the need to appoint a qualified administrator and having an efficient administrator who is independent allows a company to obtain expertise at the most affordable cost without any potential conflict of interest.

1.The Role of the Employee Benefits Administrator

The role of the administrator is to replicate the administrative services of an insurance company and its functions can be summarised as follows:

(i) Bookkeeping

Adequate systems are required to monitor claims and performance. Details of each claim need to be kept and these will include the date of loss, amount and type. It is important to be able to set up adequate reserves (see below) on individual claims in order to determine a true picture of the program's performance. Efficient monitoring and reporting also assists the self-insurer in reacting quickly to poorer than expected loss experience.

(ii) Paying Claims

Claims Payments require specialist skills and expertise. As well as ensuring that all claims are settled promptly, the administrator also needs to determine whether there could be any potential subrogation against third parties, whether the self-insurer is likely to face a claim from a third party and also what the ultimate expected losses will be.

(iii) Loss Reserving

In order that adequate funds can be set aside for claims as well as to assist with the monitoring of the program reserves, need to be established for losses that have either happened and not yet been paid or which have happened or may happen and which have not yet been reported. Often claims adjusters are hired to review losses and to make sure that the self-insurer is not being charged too much for a claim. Loss reserving is most complex on liability claims as these award are often subject to court rulings to decide liability and damages however efficient claims handling can play a role in preventing claims going to court. Actuaries can play a key role in reserving as they can be used to project overall loss ratios following development payment patterns on previous claims. Triangulations, sometimes known as point in time studies, can also be used to project a final loss ratio by examining prior years' loss ratios after certain timeframes and applying any trend in deterioration to current years premiums.

(iv) Negotiating Managed Care Arrangements

Most professional administrators will have access to Preferred Provider Networks, Large Case Management Firms and Utilization Review Companies. Preferred Provider Organizations provide discounted services in return for being the self-insured plan's chosen network. Large Case Managers are used to negotiate with providers on large claims and to endeavour to keep costs as low as possible. Utilization review companies are used to audit large bills. All of these companies play a role in keeping costs down which ultimately saves the self-insurer money.

(v) Assisting with the purchase of Stop-Loss Insurance

A professional administrator will often have relationships with a number of insurers or managing general underwriters. It may make sense for a self-insurer to use a company with whom its administrator has a good working relationship, as any disputes should be more readily fixable. If the administrator is securing coverage for a number of its clients with one insurer then there may be additional economies of scale.

2. Types of Employee Benefit Plan Administration

There are three possible approaches:

(i) Appointing a Third Party Administrator (TPA)

As the self-insurance industry has developed, independent Third Party Administrators have grown in number and expertise to satisfy the needs of the self-insured market. TPA's offer a variety of services which range from providing all services relating to a self-insured plan to just those required such as purely approving claims. TPA's operate in a competitive marketplace and seek to provide quality-driven services and can also play an independent role in the selection of other service providers such as the procurement of stop-loss.

(ii) Entering into an Administrative Services Only ASO arrangement

As insurance companies have the infrastructure and capability to administer self-insured plans, they sometimes perform the administrative functions in return for a fee that would otherwise have been included in a standard insurance premium. Companies offering ASO arrangements will often seek to provide stop-loss insurance as well as life and disability coverages.

(iii) Self-Administration

Self-Administration has traditionally only been performed by the largest companies that can allocate resources and staff to administer employee benefits. This option is however becoming more viable to smaller companies with the advent of software packages designed for in-house administration. Self-administration does require adopting a degree of legal responsibility that might be otherwise avoided by having the administration out-sourced. Companies electing to self-administer should be careful not to fall foul of Department of Labour conflict of interest concerns that might arise if the employer seeks to save costs by delaying or denying valid claims.